Consumer bankruptcies soar 34% in July from a year ago

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A classic measure of Americans’ financial distress: U.S. consumer bankruptcy filings totaled 126,434 in July, the highest for any month since Congress rewrote bankruptcy laws in October 2005.

The July figure, reported today by the American Bankruptcy Institute, was up 34% from July 2008 and an 8.7% increase from the 116,365 filings in June.

So far this year 802,000 consumer bankruptcies have been recorded, up 36% from the 589,000 in the first seven months of last year, institute data show.

The record for any year was 2 million filings in 2005, which reflected a rush before Congress changed the laws and made it more difficult for consumers to escape their debts under bankruptcy.

Filings plunged to just under 600,000 in 2006. They jumped to 1.07 million last year as the recession and housing crash began to take their toll on Americans’ finances.

Sam Gerdano, executive director of the institute, predicts that total personal bankruptcy filings will reach 1.4 million for 2009.

Despite Congress’ intent to make it harder for many people to wipe out their debts by using Chapter 7 bankruptcy -- the ‘liquidation’ form of relief -- most people still are trying to take that route. Chapter 7 filings accounted for more than 70% of July bankruptcy filings; Chapter 13 filings, under which a consumer must work out a multi-year debt repayment plan with all creditors -- accounted for 28% of last month’s filings.

The laws of economics ‘are more powerful than the laws of Congress,’ Gerdano said. Given the double-whammy of high debt loads and soaring unemployment, ‘People are going to look to find some area of relief,’ he said, even if Congress has raised the hurdle for bankruptcy.

Gerdano noted that filing for bankruptcy isn’t a way for someone to automatically save their home, because secured debts still have to be paid.

‘But by getting out from under other debt, that might free up more current income so you can make the mortgage payment,’ he said.

For many people whose homes are worth far less than their mortgage, it has become logical to do the opposite: forget the mortgage, and focus on staying current on car payments and credit cards -- the credit they need to live.

Hence, the rising number of people walking away from their homes.

-- Tom Petruno